Medicare’s ‘Piggy Bank’

Republicans claim the president’s $716 billion “cuts” to Medicare hurt the program’s finances. But the opposite is true. These cuts in the future growth of spending prolong the life of the Medicare trust fund, stretching the program’s finances out longer than they would last otherwise.

Mitt Romney has claimed that President Barack Obama has “robbed” Medicare. Rep. Paul Ryan, Romney’s running mate, said Obama “turned Medicare into a piggy bank to fund Obamacare,” promising to “stop the raid on Medicare.” And the Republican National Committee is promoting on its website a feature it calls “Obama’s Countdown to Medicare’s Bankruptcy,” which lists the days, hours, minutes and seconds left until the Medicare Part A trust fund is exhausted. But there would be even fewer days until the fund’s exhaustion if Obama’s health care law hadn’t included those $700 billion in spending reductions.

It’s true that experts, including Medicare’s chief actuary, doubt that some of those spending cuts will actually be implemented. But if they are, Medicare would spend less each year than it had been expected to otherwise, allowing Medicare to stretch further the income it receives from payroll taxes and premiums.

How a Cut Helps the Medicare Budget

To some voters, it may sound counter-intuitive at first to think that cutting money from Medicare would improve, not weaken, its finances. But, again, this is a reduction in the future growth of Medicare spending over 10 years. And spending less is a good thing for Medicare’s finances — as it is for most people’s.

For instance, let’s say someone has a dedicated coffee budget but decides to drop a daily latte habit and instead buy regular coffee. That person’s coffee budget took a big cut in spending, enabling the budget to last longer. Instead of one month of lattes, this java fan can have two months of coffee.

The biggest savings from the Affordable Care Act come from reductions in the future growth of payments to hospitals — about $415 billion over 10 years. That’s Medicare Part A. Income for Part A comes mainly from payroll taxes. If Medicare doesn’t need to spend that income immediately, it’s credited to Part A’s trust fund, and Medicare gets a Treasury bond that it can cash in later. Anytime Medicare needs to cash in that bond, Treasury must pay it. Even if Treasury spent the original money on something else, it must pay the bond.

So, campaign claims that imply that Obama has taken money out of Medicare, and Medicare won’t ever get it back, are simply not true.

At an Aug. 21 campaign stop in West Chester, Pa., Ryan said Obama and the Democrats “turned Medicare into a piggy bank to fund Obamacare. They took $716 billion from Medicare to pay for their Obamacare program.” On the other hand, he added, Republicans are “being candid with our current seniors” and “saying stop the raid on Medicare.”

Unfortunately for Medicare there isn’t $700 billion in any kind of “piggy bank” to “raid.” The trust fund doesn’t have anywhere near that much money — the Part A trust fund only contained $244.2 billion at the end of 2011. And the president can’t actually take money out of the trust fund. Medicare holds those Treasury bonds, and, as we said, it can cash them in anytime it needs the money.

The problem for Medicare is that the trust fund isn’t going up — it’s declining year after year. Some voters may get the mistaken impression that money they paid in to Medicare will pay their benefits once they retire. But as a practical matter the program functions as a pay-as-you-go system. And current income isn’t enough to pay all current benefits.

Without the spending cuts in the Affordable Care Act, the Part A trust fund was expected to be exhausted in 2016. With the ACA cuts, that date was pushed back to 2024.

That makes the RNC’s bankruptcy clock a bit curious. If the federal health care law hadn’t included those cuts to spending, there would be even less time left on that countdown.

Bankruptcy Blunders

That doesn’t mean that Medicare will be “bankrupt” — either in 2016 or 2024 — as both campaigns are fond of saying. Obama’s deputy campaign manager, Stephanie Cutter, and Romney supporter and former Pennsylvania Sen. Rick Santorum offered these competing claims on CNN’s “State of the Union“:

Cutter: The last point on this, if they put that money — put that savings back into the system, it means that Medicare will go bankrupt in just four years. So if Mitt Romney and Paul Ryan get elected to the White House, Medicare will be bankrupt by the end of their first term, that is what that means.

Santorum: And I just listened to the Obama spokesperson before this, I mean my head was spinning. To suggest that adding $700 billion back to the Medicare program is going to cause its financial collapse, that — you can only make that statement if you have been in Washington way too long.

Santorum is off base, as we’ve explained. If $700 billion isn’t cut from the growth of future Medicare spending, Medicare will spend money out of that trust fund more quickly, leading to its exhaustion at a much sooner date. But Cutter goes too far in saying that the program would be “bankrupt.”

Part A could still spend what it takes in from payroll taxes, though it would not be enough to cover all benefits. The Medicare trustees say that the tax “would cover only 87 percent of estimated expenditures in 2024 and 67 percent in 2050.” And that’s only Part A. Physician and drug costs, which are covered by Parts B and D, are covered by general revenues and premiums paid by seniors. Treasury must pay whatever is necessary to meet the costs for Parts B and D each year. (For more on Medicare’s finances, see our Aug. 22 article, “A Campaign Full of Mediscare.”)

Also, the trustees have been warning about the exhaustion of the Part A trust fund since 1970, but Congress has never allowed the fund to be depleted. Congress has always taken some action, often raising payroll taxes to extend the life of the fund.

Double-Counting

The Romney campaign’s real complaint is that the Affordable Care Act counts those Medicare savings as money that can cover other aspects of the law. But the money can’t pay for two things at once.

When we asked the campaign how it could argue that Obama’s spending reductions didn’t extend the life of the trust fund, a spokesman replied that it didn’t extend the fund “unless the administration is ready to admit their law blows a huge hole in our deficit.”

The fact remains that Obama can’t take away the Medicare trust fund bonds. But both the nonpartisan Congressional Budget Office and Richard Foster, Medicare’s chief actuary, have said that the law can’t extend the life of the trust funds and pay for other measures at the same time. Foster said in 2011 testimony: “In practice, the improved HI [hospital insurance] financing cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.”

What happens in government accounting is that after Treasury issues a bond that it will have to pay later, it can spend the money it received on other things. And it often does, whether that’s coverage expansion, as called for in the health care law, or any number of things. The Romney spokesman said it was “a shell game.”

But that doesn’t mean that the Medicare trust fund will be slashed or its “piggy bank” “robbed” or “raided,” or any other claim we’d put firmly in the category of “senior scare.”

As we’ve said before, both the Romney and the Obama campaign propose cutting the growth in Medicare spending over the long run, and both would have to find ways to reduce spending or increase revenues to extend the trust fund in the near future. Obama has done so mainly by reducing the growth in payments to hospitals, but the Medicare trustees have said that many experts believe the “price constraints would become unworkable and that Congress would likely override them.” The Romney campaign says its health care proposals — which include limiting medical malpractice damages, promoting “alternatives to ‘fee for service’ ” and allowing the sale of insurance policies across state lines — would lower health care costs in the country in general, so Medicare costs would come down, too. That also remains to be seen.